Innovation Credit Union v. Bank of Montreal, (2010) 407 N.R. 294 (SCC)

• Judge: McLachlin, C.J.C., Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell, JJ.
• Court: Supreme Court (Canada)
• Case Date: April 19, 2010
• Jurisdiction: Canada (Federal)
• Citations: (2010), 407 N.R. 294 (SCC);2010 SCC 47

Innovation Credit v. Bk. of Mtrl. (2010), 407 N.R. 294 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2010] N.R. TBEd. NO.003

Bank of Montreal (appellant) v. Innovation Credit Union (respondent)

(33153; 2010 SCC 47; 2010 CSC 47)

Indexed As: Innovation Credit Union v. Bank of Montreal

Supreme Court of Canada

McLachlin, C.J.C., Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell, JJ.

November 5, 2010.

Summary:

At issue was the priority between the security interests of a bank and a credit union. The credit union's interest was granted prior to the bank's but was not registered in the Saskatchewan Personal Property Registry until after the bank had registered its interest under the Bank Act.

The Saskatchewan Court of Queen's Bench, in a decision reported at (2007), 306 Sask.R. 227, held that the bank's security interest, although taken after the credit union's security, had priority to that of the credit union because the credit union's interest was not perfected by registration prior to the bank taking its security interest and registering notice of its intention to do so under the Bank Act. The credit union appealed.

The Saskatchewan Court of Appeal, in a decision reported at (2009), 324 Sask.R. 160; 451 W.A.C. 160, allowed the appeal, finding that the credit union's first in time Personal Property Security Act interest had priority over the bank's Bank Act security. The bank appealed.

The Supreme Court of Canada dismissed the appeal.

Editor's Note: This decision was released with a companion decision, Radius Credit Union Ltd. v. Royal Bank of Canada, 407 N.R. 267; 2010 SCC 48.

Banks and Banking - Topic 5222

Loans - Secured loans - Section 427 (formerly ss. 88 and 178) loans - Nature of security under s. 427 - [See fourth Banks and Banking - Topic 5236 ].

Banks and Banking - Topic 5236

Loans - Secured loans - Section 427 (formerly ss. 88 and 178) loans - Priorities - At issue was a priority dispute between a prior unregistered security interest taken by a credit union under the Saskatchewan Personal Property Security Act (PPSA) in agricultural equipment and a subsequent security interest taken by a bank and registered under the Bank Act in the same collateral - The Supreme Court of Canada discussed the differences between the two security regimes contained in the PPSA and the Bank Act - The court noted that while s. 428 of the Bank Act expressly gave a Bank Act security interest priority over "all rights subsequently acquired in, on or in respect of that property", the Bank Act was silent regarding conflicting third party interests acquired prior to the attachment of the bank's security - Thus, the Bank Act left most priority disputes to be resolved by considering whether, on the basis of property law, the proprietary rights granted to the bank under s. 427(2) had precedence over the competing proprietary interests - This meant that the Bank Act could be characterized as a property-based security regime - See paragraphs 14 to 16 - In contrast, the PPSA followed what could be characterized as a priority-based approach - For interests that came within its scope, the PPSA provided a compendium of rules establishing priority rankings with no regard to the question of who actually had title to the collateral - It was not, however, a fully comprehensive code - Under s. 4(k), the PPSA did not apply to a security agreement "governed by sections 425 to 436 of the Bank Act" - See paragraphs 17 to 23.

Banks and Banking - Topic 5236

Loans - Secured loans - Section 427 (formerly ss. 88 and 178) loans - Priorities - At issue was a priority dispute between a prior unregistered security interest taken by a credit union under the Saskatchewan Personal Property Security Act (PPSA) in agricultural equipment and a subsequent security interest taken by a bank and registered under the Bank Act in the same collateral - The Supreme Court of Canada discussed the relationship between the Bank Act and the PPSA and how to resolve priority disputes between them - Having characterized the Bank Act as a property-based security regime and the PPSA as a priority-based approach, the court noted that where the Bank Act contained an express priority provision that applied to a particular priority dispute, that provision governed - For example, under s. 428(1), a Bank Act security interest had priority over rights subsequently acquired in the property, as well as over unpaid vendors - However, where the priority dispute was between a Bank Act security interest and a conflicting prior interest, there was no specific priority provision in the Bank Act - Yet, the provisions of the Bank Act governed - These priority disputes were resolved by determining what proprietary rights were granted to the bank under s. 427(2) of the Bank Act - The combined effect of ss. 427(2) and 435(2) was that the bank could acquire no greater interest in the collateral than the debtor had at the relevant time - At this point, the PPSA became relevant for the purpose of determining what interest the debtor might have already conveyed to another creditor and what was left to convey to the bank - While the internal priority rules of the PPSA could not be invoked to resolve the dispute, the PPSA was relevant to determining the nature of the prior competing interests - The two statutes had to be read harmoniously - The court concluded that the "Bank Act is dependent on provincial property law in order to give content to its provisions and to identify precisely the rights of the parties in a priority dispute involving Bank Act security" - See paragraphs 24 to 32.

Banks and Banking - Topic 5236

Loans - Secured loans - Section 427 (formerly ss. 88 and 178) loans - Priorities - A farmer granted the credit union a security interest in all of his present and after acquired personal property under a general security agreement dated October 7, 1991 - Between 1998 and January 2004, the respondent bank, after conducting both Bank Act and Saskatchewan Personal Property Security Act (PPSA) security registration searches, lent the farmer money under security agreements and took security under s. 427 of the Bank Act - In June 2004, the credit union registered its security interest in the farmer's property at the Personal Property Registry - In December 2004, the farmer defaulted on his bank loans - The bank seized his property - The credit union applied for an order under s. 66 of the PPSA that it had a priority claim to the property - A chambers judge applied s. 428(1) of the Bank Act to dismiss the application - The credit union's appeal was allowed on the basis that s. 428(1) did not apply here - The Supreme Court of Canada agreed - The chambers judge's conclusion that s. 428(1) was determinative ignored the fact that the credit union had an existing valid security interest in the collateral, albeit unperfected - Section 428(1) clearly did not apply to the question of whether the bank's security interest had priority over this prior unperfected PPSA interest - The dispute had to be resolved by examining what rights were acquired by the bank when it took its security interest and determining whether those rights were subject to the credit union's prior PPSA interest - See paragraphs 33 and 34.

Banks and Banking - Topic 5236

Loans - Secured loans - Section 427 (formerly ss. 88 and 178) loans - Priorities - At issue was a priority dispute between a prior unregistered security interest taken by a credit union under the Saskatchewan Personal Property Security Act (PPSA) in agricultural equipment and a subsequent security interest taken by a bank and registered under the Bank Act in the same collateral - The Supreme Court of Canada discussed the nature of the security interest conveyed under the Bank Act - The question was what rights were acquired by a bank when it received (under s. 427(2)(c) of the Bank Act) "the same rights and powers as if the bank had acquired a warehouse receipt or bill of lading in which that property was described" - The question was answered by s. 435(2) of the Bank Act, which specified that the effect of a warehouse receipt or bill of lading was to give the bank all the right and title of the owner of the goods - The bank acquired legal title to whatever rights the debtor held in the assigned property - Here, the debtor owned the property, but had already given the credit union a PPSA security interest in the collateral in question - He could not convey to the bank any greater interest than what he himself had left in the property - The question then became the nature of the interest already conveyed to the credit union under the PPSA - A PPSA security interest did not give a creditor full right and title to the collateral, but only an interest to the extent of the debtor's obligation - The court rejected the bank's argument that this meant that no proprietary interest was conveyed to the credit union - When the bank acquired its Bank Act security interest, the credit union already had a valid security interest in the nature of a fixed charge - Any subsequent interest could only be taken with respect to the debtor's equity of redemption in the property - Neither the lack of registration nor perfection affected this characterization - See paragraphs 35 to 50.

Banks and Banking - Topic 5236

Loans - Secured loans - Section 427 (formerly ss. 88 and 178) loans - Priorities - At issue was a priority dispute between a prior unregistered security interest taken by a credit union under the Saskatchewan Personal Property Security Act (PPSA) in agricultural equipment and a subsequent security interest taken by a bank and registered under the Bank Act in the same collateral - The bank asserted that the dispute should be resolved according to a first-to-register rule - The Supreme Court of Canada disagreed - The proper interpretation of the Bank Act gave an earlier, unperfected PPSA priority over a subsequent Bank Act interest - No provision in the PPSA subordinated an unperfected PPSA interest to a Bank Act interest - The dispute was between two competing valid legal interests in the same collateral - Under the common law, the nemo dat rule gave priority to the first party to take a legal interest in the property - The Bank Act established a property-based security scheme under which, through the combined effect of ss. 427(2) and 435(2), the bank received no greater interest in the property than the debtor had - These provisions operated in the same way as the nemo dat rule - When the bank took its Bank Act security interest, the credit union already held a statutory interest in the same collateral which, in proprietary terms, was correlative to a fixed charge - Therefore, the bank could only take its interest subject to this prior interest - The adoption of a first-to-register rule would run contrary to this - The court could not override the Bank Act provisions - Such a rule would have to be enacted by Parliament - See paragraphs 51 to 61.

Banks and Banking - Topic 5236

Loans - Secured loans - Section 427 (formerly ss. 88 and 178) loans - Priorities - At issue was a priority dispute between a prior unregistered security interest taken by a credit union under the Saskatchewan Personal Property Security Act (PPSA) in agricultural equipment and a subsequent security interest taken by a bank and registered under the Bank Act in the same collateral - The bank asserted that s. 20(3) of the PPSA had the effect of subordinating an unperfected security interest to a Bank Act security interest - The Supreme Court of Canada rejected this argument - Section 20(3) subordinated the rights of the holder of an unperfected PPSA interest to third parties who acquired the collateral for value without notice - Here, the granting of the loan constituted the giving of value and the bank took its interest without knowledge of the credit union's prior security interest - However, s. 20(3)(a) required the bank to have acquired its "interest pursuant to a transaction that is not a security agreement" - An agreement creating a Bank Act security clearly fell within the definition of "security agreement" and "security interest" in the PPSA - Section 20(3) did not operate to subordinate the credit union's PPSA interest to the bank's Bank Act interest - See paragraphs 62 to 69.

Personal Property - Topic 6002

Security interests - General - Application of legislation (incl. exceptions) - [See first Banks and Banking - Topic 5236 ].

Personal Property - Topic 6004

Security interests - General - Security interest - Scope of - [See fourth Banks and Banking - Topic 5236 ].

Personal Property - Topic 6005.2

Security interests - General - Security interest - Subordination of - [See fifth and sixth Banks and Banking - Topic 5236 ].

Personal Property - Topic 6006

Security interests - General - Security interest defined - [See sixth Banks and Banking - Topic 5236 ].

Personal Property - Topic 6007

Security interests - General - Security agreement defined - [See sixth Banks and Banking - Topic 5236 ].

Personal Property - Topic 6015

Security interests - General - Fixed charge - [See fourth Banks and Banking - Topic 5236 ].

Personal Property - Topic 6218

Security interests - Priorities - Bank Act - Section 427 loans - [See all Banks and Banking - Topic 5236 ].

Cases Noticed:

Bank of Montreal v. Hall, [1990] 1 S.C.R. 121; 104 N.R. 110; 82 Sask.R. 120, refd to. [para. 14].

Bell ExpressVu Limited Partnership v. Rex et al., [2002] 2 S.C.R. 559; 287 N.R. 248; 166 B.C.A.C. 1; 271 W.A.C. 1; 2002 SCC 42, refd to. [para. 26].

Royal Bank of Canada v. Agricultural Credit Corp. of Saskatchewan (1994), 120 Sask.R. 205; 68 W.A.C. 205; 115 D.L.R.(4th) 569 (C.A.), refd to. [para. 27].

Landry Pulpwood Co. v. Banque Canadienne Nationale, [1927] S.C.R. 605, refd to. [para. 27].

Giffen (Bankrupt), Re, [1998] 1 S.C.R. 91; 222 N.R. 29; 101 B.C.A.C. 161; 164 W.A.C. 161, refd to. [para. 32].

Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; 208 N.R. 161; 193 A.R. 321; 135 W.A.C. 321, refd to. [para. 45].

Statutes Noticed:

Bank Act, S.C. 1991, c. 46, sect. 427(2) [para. 35]; sect. 435(2) [para. 37].

Personal Property Security Act, S.S. 1993, c. P-6.2, sect. 20(3) [para. 64].

Authors and Works Noticed:

Canada, Law Commission, Modernizing Canada's Secured Transactions Law: The Bank Act Security Provisions (2004), pp. 26 to 30 [para. 25].

Cuming, Ronald C.C., and Wood, Roderick J., Compatibility of Federal and Provincial Property Security Law (1986), 65 Can. Bar Rev. 267, pp. 274 [paras. 30, 41]; 275 [para. 42].

Cuming, Ronald C.C., Case Comment: Innovation Credit Union v. Bank of Montreal - Interface between the PPSA and Section 427 of the Bank Act: Desirable Policy v. Hard Legal Analysis (2008), 71 Sask. L. Rev. 143, generally [para. 24].

Cuming, Ronald C.C., Walsh, Catherine, and Wood, Roderick J., Personal Property Security Law (2005), pp. 589 [para. 30]; 590 [para. 53].

Moull, William D., Security under Sections 177 and 178 of the Bank Act (1986), 65 Can. Bar Rev. 242, pp. 243 [para. 14]; 251 [para. 38]; 252, 253 [para. 36].

Poirier, Marc-Alexandre, Analysis of the Interaction between Security under Section 427 of the Bank Act and Provincial Law: A Bijural Perspective (2003), 63 R. du B. 289, pp. 314 [para. 36]; 360 [para. 42]; 395 to 400 [para. 24].

Saskatchewan, Law Reform Commission, Tentative Proposals for a New Personal Property Security Act (1990), generally [para. 24].

Uniform Law Conference of Canada: Commercial Law Strategy (Looseleaf), generally [para. 25].

Ziegel, Jacob S., Interaction of Personal Property Security Legislation and Security Interests under the Bank Act (1986-87), 12 Can. Bus. L.J. 73, pp. 91 to 95 [para. 25].

Ziff, Bruce H., Principles of Property Law (4th Ed. 2006), pp. 432, 433, 434 [para. 51].

Counsel:

Rick M. Van Beselaere and Peter T. Bergbusch, for the appellant;

Donald H. Layh, Q.C., and Shawn M. Patenaude, for the respondent.

Solicitors of Record:

Balfour Moss, Regina, Saskatchewan, for the appellant;

Layh & Associates, Langenburg, Saskatchewan, for the respondent.

This appeal was heard on April 19, 2010, by McLachlin, C.J.C., Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell, JJ., of the Supreme Court of Canada. On November 5,  2010,  Charron, J., delivered  the following judgment for the court in both official languages.